DEFINITION:
Rebalancing is the process of realigning your investment portfolio to maintain your desired asset allocation, typically by buying and selling assets to restore your target mix.
When & Why It’s Used:
Rebalancing is used to correct deviations from your target asset allocation that occur due to market fluctuations. Over time, some investments may outperform others, causing your portfolio to drift from your original risk and return profile. Periodic rebalancing helps ensure that your portfolio remains aligned with your goals and risk tolerance.
IMPORTANCE IN COMMUNICATION:
Discussing rebalancing with your advisor ensures that you understand how your portfolio is managed over time. Clear communication about the process, timing, and rationale behind rebalancing builds trust and provides transparency about how your investments are maintained. It enables you to ask questions about performance, fees, and market conditions that may necessitate adjustments.
Additionally, regular discussions about rebalancing help you remain engaged in the management of your portfolio. They foster a proactive approach to risk management, ensuring that your investment strategy stays aligned with your long-term financial objectives even as market conditions change.
Examples in Conversation:
“How often should we rebalance my portfolio to maintain my desired asset allocation?”
“What triggers would prompt you to adjust my portfolio’s mix of assets?”